One of the best tax breaks around is the home sale exclusion. When a single homeowner sells his house, $250,000 of profit is tax free. The nontaxable amount is $500,000 for a married home-owning couple that files jointly.
The current real estate market is horrid in many parts of the country, so making that much on a home sale and facing taxes is not a big concern for many. But things eventually will turn around.
And when the market does recover and people sell their homes, they'll want to make sure they get the most out of the home sale exclusion.
One way to do that is to increase the home's basis.
Basis is key when you determine your profit on any asset sale. You subtract the basis from your sale price to arrive at your taxable profit.
The bigger your basis, the lower your tax bill.
A home's basis starts with the amount paid for the property. Settlement and closing costs are added to that.
Today's Daily Tax Tip looks at how some home improvements can boost your property's basis.
Tax-smart home improvements: The IRS says the home improvement projects that increase a property's basis are those that materially add to the value of the home, considerably prolong its useful life or adapt it to new uses.
The IRS doesn't have a hard and firm list of what qualifies as a home improvement. IRS Publication 523, Selling Your Home, does, however, provide examples (the list below is on page 9) of improvements that add to a home's basis.
Big ticket items, such as an addition to the home, an in-ground pool and a new roof, count. But don't overlook relatively smaller upgrades, such as new windows, landscaping and a home security system.
Repairs don't count: And be sure that your work is a home improvement, not simply a repair.
Yes, home repairs are necessary to keep your home in good condition and make sure it's a place you want to live. Repairs include interior and exterior repainting, fixing gutters, replacing floors or carpeting and patching leaks.
However, repairs aren't considered by the IRS to add to the house's value. So you can't add the cost of repairs to your property's basis.
But wait, there's more. If you make substantial improvements as part of an extensive remodeling or restoration of your home, the entire job is considered a home improvement.
So be sure to hang onto your receipts for IRS-approved home improvements. They could help make sure you don't owe Uncle Sam anything when you finally sell your house.
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